(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, June 18 (Reuters) – The boom times have returned for
industrial metals over the last year as global manufacturing
activity has come roaring back from its pandemic lows.
There is more to come, according to supercycle super-bulls
such as Goldman Sachs who think that commodities demand growth
is about to undergo a tectonic acceleration as the world
Given the hype around metals such as copper right now, it’s
not surprising that someone has dusted down and repackaged an
investment idea last seen at the peak of the 2000s supercycle –
the physically-backed exchange-traded fund.
Nornickel, through its Global Palladium Fund (GPF) arm, has
just launched physically-backed copper and nickel investment
products on the London Stock Exchange.
The introduction of investors into the physical supply chain
was so controversial last time around that copper consumers
ended up taking the Securities and Exchange Commission (SEC) to
court for its approval of two big copper products.
In the end neither made it off the drawing-board and other
investment attempts to get physical with the industrial metals
markets fizzled out.
Will this time be different?
INVESTORS VS PHYSICAL BUYERS
What provoked the wrath of companies such as Southwire Co
and Encore Wire Corp when the SEC approved two physically-backed
copper funds in 2012 was the fear of investors directly
impacting the physical supply chain.
JPMorgan’s Physical Copper Trust and Blackrock Asset
Management’s I-shares Copper Trust between them proposed to hold
as much as 182,800 tonnes of copper.
JPMorgan summarized the reason for copper users’ concerns in
its own prospectus: “Since there is no limit on the amount of
Physical Copper that the Trust may acquire, the Trust, as it
grows, may have an impact on the supply and demand of copper
that ultimately may affect the price of the Shares in a manner
unrelated to other factors affecting the global markets for
You can understand why industrial players were outraged,
fearing they would be directly competing for units with
The GPF Physical Copper ETC and GPF Physical Nickel
ETC currently have assets under management of around
US$5m each, equating to physical stocks of 525 tonnes and 288
That’s not enough to move the dial in either copper or
nickel market. But with both “electric” metals expected to
benefit hugely from the transition to a low-carbon economy,
things may change if the funds draw in more investors requiring
the allocation of more physical metal at a time of tightening
Neither JPMorgan nor Blackrock actually launched their
proposed copper funds, perhaps because of the backlash from
industrial users but more likely because by the time the SEC
signed off on them, the copper price had passed its cycle peak
and was one year into a bear market that would only trough in
ETF Securities launched physically-backed metal funds in
2010 but they didn’t make it through the bear years either. At
its peak in 2013 the physical copper fund held 6,900 tonnes.
The rationale then was the same as it is now, namely to open
up industrial markets such as copper to previously untapped
GPF, which also offers four physically-backed precious
metals funds, is “committed to democratising investment in
precious and base metals,” according to the fund’s chief
executive Alexander Stoyanov.
The products come with the cachet of blockchain proof of
ownership of metal in Rotterdam, which may appeal to parts of
the digital currency investment spectrum.
Many heavyweight fund managers, meanwhile, have limited
ability to get involved in metals such as copper because they
are allowed only to invest in equity instruments not futures
An exchange traded note ticks that box with physical backing
also meeting recurring demand for hard assets.
But these products are still in essence a punt on higher
prices, albeit with green branding.
Such funds also come with some drawbacks relative to
non-physical investment products.
The physical cost of storage must somehow be recouped by the
fund manager, meaning costs tend to be slightly higher. GPF’s
copper fund has a management expense ratio of 0.85%, compared
with 0.49% management fees charged on the Wisdom Tree Copper
More significantly, physical funds forfeit the potential
yield of rolling a long position across a backwardated futures
If you’re buying a physical fund because you expect prices
to go higher, they are only likely to do so if supply-demand
balances get squeezed, which would surely be accompanied by a
tightening of futures curve time-spreads. The resulting roll
yield accentuates the returns of a futures over a physical
Somewhat counterintuitively, holding physical metal works
well for investors in an oversupplied market since they can use
the market’s curve structure to generate a return above the
costs of storing the stuff.
It’s worth remembering that the first anyone ever heard of a
physically-backed industrial metals fund was a potential
aluminium product devised by Credit Suisse, although it too came
to naught after Swiss regulators prevaricated over its approval.
GPF’s new offerings – “the world’s only physically-backed
copper and nickel Exchange Traded Commodities” – are a sure sign
that the supercycle, or at least the supercycle hype, is back.
The last supercycle, generated by China’s industrialisation,
lifted industrial metals out of the investment shadows.
Physically-backed exchange traded products were part and parcel
of the investment buzz around the commodity markets at the time.
The resulting furore and regulatory hesitation ensured that
neither the JPMorgan nor Blackrock copper product made it in
time to actually catch the super part of the cycle.
That tells you that the single biggest factor in the success
or otherwise of Nornickel’s revamped “green metal” products will
likely be price.
Given the inherent perversity of markets, it’s almost
inevitable that the launch of the funds has coincided with a
slump in the industrial metals complex. London Metal Exchange
(LME) three-month copper has this week collapsed from a
Monday high of $10,050 per tonne to a current $9,220.
The super-bulls will be undeterred, arguing that the
supercycle has only just begun.
Nornickel and its GPF fund managers can only hope they’re
(Editing by Elaine Hardcastle)